Nature and Main Areas of Financial Management Essay

Introduction: Financial management is basically makes plans, organize, direct and control the financial activities in an organization. Applying general management principle to financial resources of the organization is part of financial management activity. Financial management is concern with the efficient and effective management of the financial resources of the organization. Nature and Main areas of financial management: Financial management is broadly concerned with the mobilization and development of funds by a business organization. To run the operations of company efficiently, it is important to raise and handle the funds effectively. Financial management performs this job. Financial management works on the following areas: 1.Finding financial necessities: – A financial manager must know financial necessities of the company. He should find out financial needs of the company. Financial manager must focus on available funds which are needed to meet promotional expenses, fixed and working capital needs. The necessity of non-current assets is related to types of company. Working capital needs mainly depends on the range of business operation. If the range or scale of business operation is large then the requirement of working capital will be high. If the financial manager makes wrong assessment about financial necessities, it may cause huge damage to the company. 2.Selecting the sources of funds:- Financial management works on how to raise funds from various sources for the company. Various sources may be available for raising funds. To issue of share capital and debentures proper steps should be taken. Financial management should ask various financial institutions to provide long-term funds. Equity capital necessities may be met by getting cash credit or overdraft facilities from commercial banks. A financial manager should be very cautious in approaching different sources to raise funds. Financial management should analyze the sources before raising funds. 3.Managing working capital:- Working capital indicates to that part of company’s capital which is needed for financing short-term or current assets such as cash, receivables and inventories. Maintaining these assets to a proper level is very essential for the organization. Finance manager is required to determine the amount of such assets. 4.Financial analysis and interpretation:- One of the most important tasks of financial management is analyzing & interpretation of financial statements. Financial management expected to focus on the short term and long-term financial position of the company. Profitability, liquidity position of the company should also be monitored by financial management. Financial manager can do this by calculating a number of ratios. Making interpretation of various ratios is also essential to draw certain outcome. Financial analysis and interpretation has become an important area of financial management in modern days. 5.Cost-volume profit analysis:- Cost volume profit is also popularly known as CVP relationship. Cost volume profit analysis is a very important area of financial management. Fixed costs, variable and semi variable cost analysis is crucial for CVP or Cost-volume profit calculation. Fixed costs are more or less constant for varying sales volumes. Variable costs depend on the sales volume. Semi-variable costs can be fixed or variable in the short-term. The financial manager has to make sure that the income of the firm will cover its variable costs, for there is no meaning in being in business, if the expected amount of income is not accomplished. A company must have to earn a sufficient income to cover its fixed costs as well. Finding the break-even point is one of the major responsibilities of financial management. 6.Dividend policy:- Dividend is provided by company to the shareholders for making investment in the shares of the company. The investors mainly interested in earning the maximum return on their investments. On the other hand management wants to retain the profits for making reinvestment in future projects and opportunities. These contradictory purposes will have to be adjusted in the interests of investors and the company. The interest of shareholders and the necessities of the company are related with the dividend policy, so that’s why dividend policy is an important area of financial management. 7.Capital budgeting:- To make investment decision in capital expenditure the concept of Capital budgeting is essential. Capital expenditure is an expense the benefits of which are expected to be achieved over a period of time exceeding one year. Capital expenditure is for acquiring or improving the fixed assets. The benefits from capital expenditure are expected to be received over a number of years in future. Capital budgeting decisions are very important for any organization. Any bad or unplanned investment decision may become harmful for the company. Capital budgeting is a very important area of financial management.